Bankrupt developers sue bank they blame for their misfortune

The half-built flats were the second batch being developed for the booming buy-to-let market by Grantly, which had made some astute land purchases.

Mr Crocket says: ''There was going to be (pounds) 500,000 in the kitty when the building was complete, and eight out of nine institutions we approached said they would back us. We knew the Clydesdale Bank, and they offered us a (pounds) 700,000 loan on the back of a report by leading surveyors D M Hall which said our assets were worth (pounds) 1m.''

But the nightmare for the bank's unsuspecting clients had begun. To their shock and disbelief, the surveyor reported that the assets could be worth as little as (pounds) 500,000, and cast doubt on the business plan and the loan.

A year later the developers were raising a (pounds) 3m action against the Clydesdale Bank for negligence by Euan Wallace as the bank's agent. Within weeks, the bank had forced its clients and their company into bankruptcy, and both have now lost their houses. But the action is about to be restarted.

The man sent in by the bank was Euan Wallace, the formerly high-profile Glasgow surveyor and estate agent who went bankrupt owing the Royal Bank of Scotland more than (pounds) 500,000 earlier this year. Euan Wallace Commercial is in liquidation with debts of more than (pounds) 150,000. And when high-

profile West End estate agents Euan Wallace Residential was liquidated last January, (pounds) 85,000 was missing from the clients' funds account - deposits which may have been returnable to clients - and the matter was investigated by the Fraud Squad.

Now the Royal Institution of Chartered Surveyors is ready to announce that it has banned Mr Wallace for life from working as a surveyor.

Mr Wallace, driving a trademark silver Mercedes, enjoyed the trappings of wealth at his Mugdock home in the Stirlingshire hills. He had founded Euan Wallace & Partners, chartered surveyors, in West George Street, in 1978. A former Tory council candidate, Mr Wallace used to boast of his visits to Borders shooting parties hosted by former Scottish Conservative chairman Lord Sanderson, and of other connections in high places such as his neighbour Sir Jack Harvie, known for his work as the party's champion fundraiser.

Mr Wallace's last advertised properties a year ago were on a site being developed by Sir Jack Harvie's company, which also held a standard security over Mr Wallace's house.

In the (pounds) 3m court action which is about to be relaunched against the bank in the Court of Session, Mr Crocket and Mr Duffy and their company claim that the bank's continued hiring of Mr Wallace was disastrously compromised by his track record, and by the fact that both he and his companies were heavily in debt to the bank, at a time when he was already staring bankruptcy in the face.

That will give the court the opportunity to see the ''Wallace files'' - a cache of 80 boxes of files which Mr Crocket and Mr Duffy stumbled across last May.

One of Mr Wallace's disgruntled creditors, who had not been paid for storing the boxes, offered them for sale for (pounds) 1.

''The guy said he had been about to put them on a skip when he realised that Wallace's business correspondence and diaries going back 20 years might be of interest to us,'' Mr Duffy says.

In his first report for the Clydesdale Bank on Grantly, Mr Wallace recommended that its existing sales agent, Allen & Harris, part of the Royal & Sun Alliance insurance group, be sacked. He said Euan Wallace Residential could do a better job selling flats on Grantly's first site at Carmunnock.

Mr Wallace also recommended that the group's second project at Mount Vernon was in such a mess that Euan Wallace Commercial should be appointed to manage it to completion, at (pounds) 500 a day.

Grantly was unhappy. ''We protested that Wallace had made simple arithmetical errors,'' says Mr Crocket. ''He had missed out (pounds) 230,000 of assets, miscounted the company's bank standing by (pounds) 100,000, and undervalued the two sites by (pounds) 270,000.''

Grantly also complained to the bank about the conflict of interest in giving Mr Wallace the dual role of selling the flats as quickly as possible, and managing the developments, clocking up more fees the longer it took to sell the flats. But the bank backed Mr Wallace. In a series of letters it insisted that the appointment of Mr Wallace's companies to the dual roles was a condition of continuing bank support. The alternative would have been calling in the (pounds) 700,000 loan within seven days. ''Re-banking elsewhere would clearly have been impossible in that timescale,'' Mr Crocket says.

The projects began to move from profitable to struggling. Before Mr Wallace's arrival, Allen & Harris had sold one Carmunnock flat for a commission of (pounds) 900 and Grantly had sold several more at a cost of (pounds) 2500. Euan Wallace Residential spent five months, sold one flat, and invoiced for (pounds) 66,000.

Work at Mount Vernon, due to be completed by early 1999, slowed to a snail's pace as Euan Wallace Commercial ran up a hefty bill, with continuing recommendations that work be stopped.

In November 1999, the Clydesdale agreed to keep Grantly afloat on one condition: that its clients sign a binding agreement not to sue the bank for negligence.

Michael Robson, an Edinburgh lawyer whose one-man firm Robson's WS SSC raised the damages action against the Clydesdale after it had been turned down by a number of Glasgow law firms, says: ''Why did the bank insist on that condition if it had nothing to fear?''

Mr Wallace, quite apart from his precarious financial position, had a chequered track record.

In June 1996 he had been asked to resign as chief executive of Westscot Homes, the property company he had set up and run for seven years, after auditors Arthur Andersen reported that Westscot had paid Mr Wallace's companies (pounds) 188,000 in ''unauthorised'' fees.

Edinburgh merchant bank Quayle Munro then withdrew its support for Westscot's expansion because of ''the calibre of the management'' and a ''serious breach of trust''. That had been revealed publicly in a Court of Session judgement by Lord MacFadyen, published in early 1999, who said of Mr Wallace: ''The manner in which he gave evidence did not generally impress me as being candid. It seemed to me there was force in the points made ... against Euan Wallace's credibility and probity generally.''

In a previous judgement on another unsuccessful action brought by Mr Wallace to recover money, Sheriff Colin Henry had said Mr Wallace appeared ''glib and well-rehearsed in his evidence'' and that ''his recollection is not to be relied upon''.

The Clydesdale Bank has claimed in its defence to

Grantly's court action that in late 1998 the bank was unaware that it had any banking relationship with Mr Wallace, was unaware of his (pounds) 1.2m of debts elsewhere, and was unaware of the court judgements against him.

But Mr Wallace's partnership had banked with the Clydesdale since 1978. Since 1992 Mr Wallace had been sent in by the bank to report on a series of significant projects being developed by bank clients around the country. And in 1996 the Clydesdale Bank had been ready to approve a massive (pounds) 10m loan to enable Mr Wallace to float Westscot Homes as a (pounds) 45m company on the Stock Exchange.

In April 1998, Mr Wallace had been forced to put his partnership into trust (liquidation) with unpaid debts of (pounds) 700,000. And in June 1998 the Royal Bank of Scotland had petitioned the court for Mr Wallace's sequestration (personal bankruptcy) with unpaid debts of (pounds) 488,000.

Mr Wallace fended off the bankruptcy for three years, but only because his empire of companies was wholly dependent on the Clydesdale for continued trading, owing the bank more than (pounds) 100,000. The Royal Bank finally made Mr Wallace bankrupt earlier this year.

When his partnership went bust, Mr Wallace created a ''phoenix'' company, with similar trading names, which continued its work for the Clydesdale, uninterrupted. An independent report commissioned for the court action by Robson's suggests that the bank ought to have listened more to its clients, and less to its hard-pressed agent.

The report by Andrew Mason, a member of two expert panels of the Royal Institution of Chartered Surveyors, says Mr Wallace's fees were excessive, his reports were not impartial, his key valuations had been proved wrong, and his role, which the bank had forced the clients to accept, had caused ''a huge

disruption to the completion of the project'' and thus had ''a

devastating effect on Grantly's business''.

In March 2000, three months after the court action was first lodged, came a bombshell.

''The bank came in and sequestrated us personally and the company, which we didn't anticipate,'' says Mr Duffy. ''We knew that our sites were still worth more than what we owed the bank. But it effectively stopped us from pursuing the court action against the bank.''

Mr Duffy was evicted with his young family from their home and saw his furniture taken away and destroyed. Mr Crocket too has now lost his house.

For 18 months the developers have been fighting to get the sequestration recalled (reversed) by the court. All the creditors have been consulted, and none has objected - except one: the Clydesdale Bank.

The Financial Services Authority flew Richard Crocket and Graham Duffy down to its London offices for interview in July and then carried out a three-month investigation. In October it wrote to the Clydesdale Bank asking for a response.

The Clydesdale Bank commented: ''How the bank deals with its regulators is confidential.'' On all other issues, the bank said it could not comment because of customer confidentiality, or litigation, but on Mr Wallace's dual appointment, the bank said: ''In general it is not unusual for surveyors to have these roles.''